Hoping For Payout, Investors Become Landlords

Renzo Salazar maintains the yard around a foreclosed house in Miami after the bank hired him to keep the home from falling into complete dilapidation.

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Originally published on April 16, 2012 3:08 am

The housing market has a new frontier — turning foreclosed homes into rental properties. Some big-time investors are starting to buy up thousands of homes to turn into rentals. That might help shore up home prices. But some housing advocates are nervous.

For decades, most single-family homes available for rent have been owned by mom-and-pop landlords. Sometimes it's the nice old guy up the street who owns a couple of rental homes, and some even offer advice on the Internet.

But, it's not just mom-and-pops anymore. With the collapse of the housing market, some professional investors with a lot of money smell an opportunity. Right now, there are fewer people able to own a house and more looking to rent. That's driving up rental costs. Meanwhile, there's a glut of foreclosed properties being sold on the cheap.

Jack Macdowell, the chief investment officer of Carrington Capital Management, is looking to spend nearly half a billion dollars buying up foreclosed homes and turning them into rental houses. And he's not alone. Doug Brien, a managing director of Waypoint Homes in Oakland, Calif., is buying in California and around Phoenix.

"We've purchased almost 1,300 homes; we actually bought 137 homes last month," he says. Brien, it turns out, is a retired NFL field goal kicker who played for the New Orleans Saints.

"The entire time I was playing, I was investing in apartment buildings, learning that business, and when I retired in 2005 I went to work for a real estate investment firm for a couple of years," he says.

One thing led to another and Brien co-founded this company buying up foreclosed homes. Now he's lined up $200 million from an investment firm. Brien says companies like his are looking to consolidate and professionalize the single-family home rental market.

'A New Industry'

"This is a new industry that's unfolding, there are no brands," he says. "This is really an unprecedented opportunity for us to come into a new space and be the one to set the bar in terms of how this industry is going to be run."

Still, there will definitely be challenges. Scott Simon is a managing director at PIMCO — a firm that's one of the biggest mortgage bond investors in the world. He says there's a reason the landlords are mostly mom-and-pops.

"It works really well if you do them in your own neighborhood and you buy five homes and you manage them yourself. It gets a little dicier as you get to 100," Simon says.

Managing more than a thousand homes in three or four cities — with broken furnaces, leaky roofs and people not paying rent — can present more of a challenge.

"That scale gets somewhat dubious, the numbers aren't quite as good. But there's a tremendous amount of money in the private equity space, for example, that's chasing these kind of investments," Simon says.

And, if it continues to grow, Simon says it's conceivable that these investors could convert a million or more foreclosed homes into rentals. That means they wouldn't be sitting for sale, weighing down the housing market.

"And it would take off the excess supply, so it would actually be a very good thing for single-family housing," Simon says.

But housing advocates have some concerns. Andrew Jakabovics is a policy director with Enterprise Community Partners, an affordable housing nonprofit. He says in the past, when speculators have started buying up a lot of houses, that's sometimes led to problems.

"They would slap a coat of paint on the property, stick an unsuspecting household in there either as renters or as owners, and there would be no maintenance of the property, and so you'd have further deterioration of areas that were already hard hit by foreclosures," Jakabovics says.

He wants to work with the government and investors to develop some safeguards and guidelines. Meanwhile, the government-owned mortgage giant Fannie Mae is starting to gear up to sell thousands of foreclosed properties through bulk sales to investors.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

STEVE INSKEEP, HOST:

In this country, economic disaster for some people has become an opportunity for others. The disaster was the wave of home foreclosures in the recession. Some big investors are seizing the chance to turn those homes into rental properties.

Chris Arnold reports.

CHRIS ARNOLD, BYLINE: For decades now, you've been able to rent a single-family home in many parts of the country. But most are owned by mom-and-pop landlords. Sometimes it's the nice old guy up the street who owns a couple of rental homes, and some even offer advice on how to do that on the Internet.

UNIDENTIFIED MAN: Buy your own house that you're going to live in, and next you want to buy an extra house that you can rent and that will help you make payments on your original house.

ARNOLD: But it's not just mom and pops like this anymore. With the collapse of the housing market, some professional investors with a lot of money smell an opportunity. Right now, there are fewer people able to own a house and more people looking to rent. That's driving up the cost of rents. Meanwhile, there's a glut of foreclosed properties being sold on the cheap. Jack Macdowell is the chief investment officer of Carrington Capital Management.

JACK MACDOWELL: We've partnered with a private equity firm looking to deploy $450 million into the rental space.

ARNOLD: So Macdowell's saying he's looking to spend nearly half-a-billion dollars buying up foreclosed homes and turning them into rental houses. And he's not alone. Doug Brien is a managing director of Waypoint Homes in Oakland, California. He's buying in California and around Phoenix.

ARNOLD: Brien, it turns out, is actually a retired NFL field goal kicker, mostly with the New Orleans Saints.

UNIDENTIFIED MAN: So how did you go from kicking in the NFL to this?

BRIEN: You know, the entire time I was playing, I was investing in apartment buildings and learning that business. And when I retired in 2005, I went to work for a real estate investment firm for several years.

ARNOLD: And one thing led to another, Brien co-founded this company, buying up foreclosed homes. And now he's lined up $200 million from an investment firm.

BRIEN: This is a new industry that's unfolding. There are no brands. This is really an unprecedented opportunity for us to come into a new space and be the one to set the bar in terms of how this industry's going to be run.

ARNOLD: Still, there will definitely be challenges. Scott Simon is a managing director at PIMCO, a firm that's one of the biggest mortgage bond investors in the world. He says there's a reason that the landlords are mostly mom and pops.

SCOTT SIMON: It works really well if you do them in your own neighborhood and you buy five homes and you manage them yourself. It gets a little dicier as you get to 100.

ARNOLD: When you get up above a thousand homes and you're trying to manage 50 broken furnaces, people not paying rents, leaky roofs, spread all over three or four cities...

SIMON: That scale gets somewhat dubious. The numbers aren't quite as good. But there's a tremendous amount of money in the private equity space, for example, that's chasing these sort of investments.

ARNOLD: And, if it continues to grow, Simon says it's conceivable that these investors could convert a million or more foreclosed homes into rentals. That means these homes wouldn't be sitting there for sale, weighing down the housing market.

SIMON: And it would take off the excess supply. So it would actually be a very good thing for single-family housing.

ARNOLD: Housing advocates definitely have some concerns, though. Andrew Jakabovics is a policy director with Enterprise Community Partners. It's an affordable housing nonprofit. He says in the past, when speculators have started buying up a lot of houses, that's sometimes led to problems.

ANDREW JAKABOVICS: They would slap a coat of paint on the property, stick an unsuspecting household in there, either as renters or as owners, and there would be no maintenance of the property. And so you'd have further deterioration of places that were already hard-hit by foreclosures.

ARNOLD: So Jakabovics wants to work with the government and investors to develop some safeguards and guidelines. Meanwhile, the government-owned mortgage giant Fannie Mae is starting to gear up to sell thousands of foreclosed properties through bulk sales to investors. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.